The real level of unemployment in Britain is almost three times as high as the official claimant count and has remained unchanged at 2.6 million in the second half of Tony Blair's time in Downing Street, according to a report released today.

A study by researchers at Sheffield Hallam University found that in addition to the 900,000 people out of work and claiming benefit, Britain had another 1.7 million "hidden jobless".

The report said the main reason for the discrepancy was that the official unemployment figures failed to count those diverted on to other benefits or out of the welfare system altogether. In particular, one million of the 2.7 million people on incapacity benefit should be regarded as being in hidden unemployment, the researchers said.

Professor Steve Fothergill, who led the study, said: "This does not mean that one million incapacity claims are fraudulent, but these men and women would almost certainly have been in work in a genuinely fully employed economy."

The report comes as the latest set of unemployment figures are released today and follows similar studies in 1997 and 2002. It will add to the debate about the real level of unemployment in Britain by saying that neither of the government's measures of joblessness accurately captures the state of the labour market. The claimant count measure shows unemployment at just over 900,000 while the labour force survey, using an internationally agreed methodology, puts the total at 1.69 million.

Researchers said the report's findings had raised eyebrows in Whitehall, proving less welcome to Labour than a study using similar methodology published shortly before the 1997 election. "The then shadow chancellor, Gordon Brown, must have thought it made sense because his office asked if we could circulate it to all Labour candidates," the report said.

It said that while the government is entitled to say that joblessness has fallen during its decade in office, the decline has been smaller than that suggested by the official data, and that most of the improvement took place between 1997 and 2002, when the real level of unemployment dropped by 560,000. Since 2002, there has been a fall of just 10,000.

The figures show that hidden unemployment is particularly concentrated in the older industrial areas of the north, Scotland and Wales. The estimated real rate of unemployment is well above 10% in a number of cities, including Liverpool, Glasgow and Middlesbrough, and in several former coal-mining areas, while in contrast much of the south of England outside London is at, or close to, full employment.

Even so, the biggest falls in "real" unemployment have taken place in those areas that suffered from the highest levels of joblessness a decade ago.

"The modest fall in real unemployment since 1997 therefore to some extent understates the true scale of Labour's achievement. Joblessness has fallen, and it has fallen most in some of the places where it was once highest. Above all, perhaps, there has been no return to unemployment on the scale of the Conservative years," said the report.

It added, however, that the surge in incapacity benefit numbers remained the principal means by which the labour markets of older industrial Britain had adapted to the large-scale job losses of the 1980s and 1990s.

"In these places, labour supply came into balance with lower labour demand not by out-migration or by the creation of conventional unemployment on a vast scale but by the withdrawal of enormous numbers of men and women from the labour market on to incapacity benefits.

"It is hard to dispute that at the time this increase occurred it was anything other than a form of hidden unemployment," it said.

Prof Fothergill said: "The large fall in claimant unemployment, coupled with the relative invisibility of unemployment on incapacity benefits or off benefits altogether, has created the misleading impression that the unemployment problem is fading away.

"Though levels of joblessness are clearly down on a decade ago and there has been no return to the sky-high unemployment of the 1980s and early 1990s, the incoming prime minister needs to be aware that many parts of the north, Scotland and Wales still have a long way to go to match the employment levels found in the booming south of England," it said.

The study found the number of jobs in the economy had risen by two million over the past decade while unemployment had fallen by 570,000. The difference was accounted for by more women joining the labour market, fewer people retiring early and immigration.

"The surge in migrants from the EU, especially Poland, appears to have occurred not so much because there are no unemployed to fill job vacancies but rather because the migrants are better able or more willing to fill the jobs that are available," it said.

The report said Labour's record on unemployment had been flattered by the perception that it inherited unemployment of three million in 1997, rather than the actual figure of 1.6 million. Moreover, three-quarters of the fall had been among men, with the biggest reductions in areas especially hard hit by the 18 years of Conservative rule.

This added to the impression that unemployment was on the wane, as had the sense that government schemes under Labour gave the unemployed job prospects rather than hiding them from the unemployment total, it said.